How Come No One is Talking About Resolute?

[Xerxes]

All great points, however, it goes back to => "sell what you want to sell" vs. "sell what you can sell".

 

In an upmarket, one can do both. Sadly, in a down market, you can only sell what you can sell (best of breed), and wished you had sold what you wanted to sell (but the liquidity is gone now). I wouldn't be so pushy, if the portfolio was not so maxed out on the equity allocation.

[glider3834]

3 hours ago, petec said:

Out of interest, why not just do this yourself? 

 

Part of the reason I own Fairfax is they generate ideas that I probably wouldn't (and have access to private opportunities that I don't). I'd be livid if they bought "obvious" megacaps like Alphabet and just sat there sucking their thumbs, unless they carefully articulated (not their strength) a divergent view.

 

Separately, as I have argued elsewhere, we need to be careful about lazily assuming that Stelco and RFP should be sold just because their stocks have gone up. I don't follow Resolute closely, but there is a decent chance that Stelco will generate so much free cash flow over the next 12 months that its enterprise value will actually have gone down over the last few months. If so, it would be quite reasonable to hold on, so long as you think the cash will be allocated effectively (management has a record of special dividends).

 

totally agree with you that there needs to be an investment case for adding any holding like GOOG and they would have done a deep dive on this one - it became a top 10 holding in their 13F over last 12 mths  - my impression from Prem's annual letters was they recognise these large tech platform businesses are great businesses but they are too expensive at the moment.

 

I am not smart enough to call the top with Stelco or RFP but as a shareholder obviously I would like to see Fairfax really max out on these investments - will leave to smarter heads than myself to make the call on this one but timing will be critical!

 

 

 

[hasilp89]

21 hours ago, petec said:

there is a decent chance that Stelco will generate so much free cash flow over the next 12 months that its enterprise value will actually have gone down over the last few months. If so, it would be quite reasonable to hold on, so long as you think the cash will be allocated effectively (management has a record of special dividends).

@petec you've slowly converted me on this one. negative EV. yes please. 

[petec]

2 hours ago, hasilp89 said:

@petec you've slowly converted me on this one. negative EV. yes please. 

Ha! I can only apologize for the disaster about to befall us both. Should’ve bought GOOG

[wondering]

https://resolutefp.mediaroom.com/2021-06-10-Resolute-Announces-1-share-Special-Dividend-and-50-million-in-Lumber-Investments

 

I assume that this dividend will go to lower the book value of Resolute held within Fairfax, as they equity account this investment.

[StubbleJumper]

1 hour ago, wondering said:

https://resolutefp.mediaroom.com/2021-06-10-Resolute-Announces-1-share-Special-Dividend-and-50-million-in-Lumber-Investments

 

I assume that this dividend will go to lower the book value of Resolute held within Fairfax, as they equity account this investment.

 

 

It wouldn't simply be recognized as dividend income?  So, debit cash, credit dividend income, no effect on Resolute holding value.  You are thinking they would debit cash, credit the Resolute asset and it wouldn't pass through the income statement? 

 

I confess that my accounting courses are now many years in the past so maybe I'm not thinking about this correctly.

 

 

SJ

[wondering]

I think that would be the case if the investment was held as mark-to-market (for example investment in Stelco).  But because they have significant influence as their holding is 30- 50% of the value of the company (please correct my numbers.  I am estimating FFH's holding in Resolute), FFH has to equity account which means if they receive a dividend, its debit Cash and credit investment in Resolute.

 

I seem to remember that Paul Rivett mentioned this on a quarterly call the last time Resolute paid a special dividend a few years back.

 

[Gamecock-YT]

I think it would be treated as a return of capital

[Xerxes]

RFP is under equity accounting.

The special dividend would be (I think) return of capital therefore lowering its cost base.

 

From 2018 Annual Letter, when RFP last paid a special dividend of $1.5 per share. You see that the $46 million lowered the investment cost from $791 million to $745 million. If it was a regular dividend, would it be return on capital vs. return of capital. Is there an accounting difference in the treatment. I am not sure i know the answer.

 

EDIT: i just remembered an additional point (but i need to verify), the equity earning ought to remove the dividend, so as to not double count since you already have the dividend in the earning stream. 

 

 

Resolute. We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date

Edited June 11, 2021 by Xerxes

[Gamecock-YT]

6 minutes ago, Xerxes said:

If it was a regular dividend, would it be return on capital vs. return of capital. Is there an accounting difference in the treatment. I am not sure i know the answer.

 

 

Taxable event vs. nontaxable event

Edited June 11, 2021 by Gamecock-YT

[Xerxes]

Thanks

return of capital  would be the non-taxable event. But would the adjustment on the equity base for the investor be any different ? vs. the taxable return on capital 

[Gamecock-YT]

It's been a little while since I was dealing with this on a daily basis so I'm a little rusty but I think it would still lower the carry value. 

Edited June 11, 2021 by Gamecock-YT
I am rusty

[StubbleJumper]

1 hour ago, Gamecock-YT said:

It's been a little while since I was dealing with this on a daily basis so I'm a little rusty but I think it would still lower the carry value. 

 

Yes, after further discussion, I believe you are correct that income earned on equity accounted investments is attributed to the carrying value and dividends paid are deducted from the carrying value.  I actually did take a couple of courses in advanced financial accounting 25 years ago, so it's a bit embarrassing to have not retained that.

 

 

SJ

[TwoCitiesCapital]

My understanding is that equity investments are accounted for at cost. 

 

Subsequent earnings of the investment proportionally increase the carrying cost. Losses and cash dividends paid would reduce the carrying cost. 

 

I don't know the return on vs return of capital characterization. My best guess is that the dividend will be taxable to Fairfax and that the characterization of 'return on' vs 'return of' is determined by the payer of the dividend and NOT the receiver or their method of accounting. 

[Gamecock-YT]

24 minutes ago, TwoCitiesCapital said:

My understanding is that equity investments are accounted for at cost. 

 

Subsequent earnings of the investment proportionally increase the carrying cost. Losses and cash dividends paid would reduce the carrying cost. 

 

I don't know the return on vs return of capital characterization. My best guess is that the dividend will be taxable to Fairfax and that the characterization of 'return on' vs 'return of' is determined by the payer of the dividend and NOT the receiver or their method of accounting. 

 

I would just make the distinction that those equity pickups would impact the carry value, not the cost. Might just be a matter of semantics. Any returns of capital would be lowering your cost basis.

 

You are correct that the company making the distribution makes the distinction between return of/return on.  Most of the time when I've had special dividend/distributions it is usually treated as a return of capital barring the cost basis being $0, in which case it is treated as a capital gain.

 

Might be a good question for their IR team to answer, they should have the answer handy.

 

[SafetyinNumbers]

On 6/7/2021 at 2:09 PM, Xerxes said:

Agreed

Folks shouldn't be in FFH or for that matter any other "asset manager", if they expect the "asset allocator" to be on the same wave length as them.

If folks want a conglomerate-like entity with large exposure to large technology cap, the S&P500 fits the bill with a 25% exposure to those names and 75% exposure to 495 companies.

 

I own ONEX, and like them to do whatever they do, in their own weird way. Same as my ownership of IAC or FFH or BRK or BAM. The only one I am missing is BX.

I am ok with FFH changing their 'investment philosophy' but they have to get to that conclusion on their own, not because I wanted to be. For instance, i don't like Markel's broad equity exposure, so I am not in it.

 

That said, we allowed to be uber-critical. LOL

 

ELF.TO is a better choice for exposure to a mostly quality stock portfolio vs FFH. Plus it trades at over a 50% discount to intrinsic value so very high margin of safety vs buying the S&P 500 (although ELF does own a bunch of VOO too). 

 

I own both but I only bought FFH recently (February 2021) because I like the pro-cyclical portfolio.

Edited June 14, 2021 by SafetyinNumbers